An extremist, not a fanatic

February 22, 2012

A temporary hiccup?

There’s one assumption which seems to be shared by most of Europe’s ruling or would-be ruling elite which I find questionable - namely, that our present economic weakness is merely temporary. This view unites (at least) four apparently different positions:

- The ECB’s long-term refinancing operations pump cash into banks but don’t (directly) improve their capital bases. This makes sense if you expect economic recovery to strengthen their balance sheets and to validate the higher asset prices caused by easy money. If, however, you expect long-term weak growth, they are not sufficient.

- Ed Balls’ call for a temporary tax cut makes sense if you think the economy will significantly pick up next year. If you don’t believe this, you should be calling for more radical action.

- The coalition expects the private sector to create enough jobs to offset public sector job loss. That this has not yet happened is, presumably, a temporary hiccup.

- The CBI says that “corporate balance sheets hold the potential for much stronger private sector investment”, and believes this potential can be fulfilled by a few tax breaks.

There is, though, an alternative possibility - that we face many years of weak growth and mass unemployment. The CBI is right to say point out that firms have lots of cash on their balance sheets. But this might be not a reason to hope for an investment boom, but rather a sign of a long-term dearth of investment opportunities. Companies in the UK have been running a financial surplus since 2002 - long before the crisis. This hints at a long-term structural problem. And it could well be that this will be exacerbated by an overhang of personal debt that restrains consumer spending and by the fact that the demand for unskilled labour in the west has long since collapsed, with the result that millions of people are unemployable from capitalists’ perspective.

If I’m right - and of course the difference between “temporary” and long-term troubles is one of degree rather than either/or - then the ruling class’s policy proposals just aren’t sufficient. Could it be that their faith in capitalism (which in fairness has been correct for a long time) is blinding them to this possibility?

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You are right. Capitalism is now completely unable to reproduce itself and never will be able to reproduce itself again except as some kind of proto-feudal stagnant pond of the kind they used to duck witches into.

Its last throw of the dice was the privatisation of the money supply initiated by Ronnie and Maggie creating a world historic credit bubble. It would take the resources of ten earths to grow out of the liabilities accumulated by the banks and foolishly though naturally guaranteed by governments and that's assuming that the monopolies had any interest in economic growth which they don't as that can only undermine their monopolies.

Yes this is the final and terminal crisis of capitalism. In the 1930s when Trotsky was writing it was still possible to point to the US and its enormous and still unrealised potential as a possible source of capitalist recovery for yet another bite of the cherry and with the help of Stalinism, first by refusing to terminate capitalism and then providing a common enemy around which the US could organise the competing imperialisms to create a global economy, so it came to pass. But there is nothing beyond globalisation only the reversal of globalisation and the decent into a new Dark Ages. It really is socialism or barbarism this time which makes it all the more urgent that the revolutionary party, the subjective factor, be built enabling the global working class to take the conscious political decision to terminate imperialist monopoly capitalism.

There is another assumption who is shared by this so called elite and also by many others. This is that crisis in life are the exception and not the rule. This deep rooted optimism seems to be resistant to the worse individual and social conditions. Maybe what we need most urgently is some healthy pessimism.

Given the collapse of demand and money supply in the periphery of Europe and weak demand in the core it makes a lot of sense to talk of a hiccup (hiccough, a more fun spelling, involving "ough" rhyming with "up")?

It seems entirely sensible to not put too much worry on a dearth of investment opportunities.

I mean, Chris, Bernanke was talking mostly about America the leading economy in the global economy. The Greek, Portuguese, Italian etc economies are replete with places to invest - plus, they don't have to do the difficult invention part, just the adoption of existing innovations.

There are many, many, many things which greeks could invest in to make themselves more productive were their economy not fooked. The same is not true for Connecticutians, but that is another matter all together.

am I right in thinking that lots of currently popular policies (attempts to stimulate the economy) are regarded by mainstream economics as sensible things to do during temporary bad times, but not helpful in the long run?

So although part of your policy prescriptions may go down well with the left (more redistribution, attacks on the power of bosses etc. I'm guessing), your argument here weighs against stimulus does it not?

@ Luis - I'm not sure. It is theoretically possible that short-term stabilization might reduce long-term growth. But given how similar long-run growth rates are across nations, this is hard to establish.
I suspect many of the ways it does so is by depressing firms' motives to invest. But if those motives are lacking, this is less of an issue.
@ LO "There are many, many, many things which greeks could invest in to make themselves more productive were their economy not fooked." I'm not sure if this doesn't support my point!
I think Bernanke did have mostly the US in mind, but given the weakness of UK capital spending,the point applies here too.
But as I say, we're not talking "either/or" here, but "and".

Ah but Chris, but we're taking about rates of growth not levels. Current economic weakness is about a lack of growth in GDP (and NGDP) not a low level of absolute production.

Greece's problems are temporary but under different circumstances a country with relatively good institutions (relative to what? Well to much poorer countries, greece could be worse) has good long term prospects.

If Greece stayed poorer than germany but grew relatively quickly we'd be more or less okay, even if it didn't catch up for a long time.

Given the UK is 20% less rich than the US (and poorer than other small countries but not many large, non-resource economies) why are there not investment opportunities?

Does the geography of the US still give it an edge, does the extent of its market, is it just hours worked and labour participation? Probably the latter two thinking about it.

How can you write this article without mentioning Richard Koo and the concept of a balance sheet recession? A Japan-style lost decade is where the UK is headed - just like Ed balls fears.

The economy can't grow until the private sector delevers to the point that there is once again more borrowing than repayment and thus credit growth resumes. Fiscal stimulus (just cut taxes if you have to) will keep credit growth going while the private sector deleveraging occurs.

The US imposed a decade of stagnation on Japan by forcing it to revalue its currency (something it would never do to China as that would mean all those Western corporations would suddenly be paying wages with actual value). Japan avoided the full consequences of this revaluation because it was surrounded by a world in the midst of a gigantic credit bubble now burst. Ironically the strong Yen whilst it crippled to economy it kept consumption on a rising curve. Japan's lost decade will be followed by a catastrophic collapse. As for UK, US and EU, a lost decade will soon seem like wishful thinking.

So why is there a lack of investment opportunities? Could it be that technological change isn't happening so fast? Maybe there's a dearth of scientific research producing the next new things to produce etc?